The following article relates to a conventional, non-invested lifetime pension annuity.

Annuity Options: The Basic Aim


Last updated: 14/01/2017


A Lifetime Pension Annuity has many options to choose from but its basic aim is to provide you with a guaranteed regular income for the rest of your life.


You buy a Lifetime Pension Annuity with some or all of the retirement savings that you have invested in a pension plan.

You can’t change providers later on.

This one of the main reasons to use your Open Market Option and shop around for the best annuity rates before committing yourself to purchasing your annuity.

Income – Level or Increasing


You will usually be offered the choice of an income that is either:

a fixed, level annuity income at outset and always stays the same or

a smaller income at outset that increases each year by a fixed percentage or in line with the RPI.

Guaranteed Period


You can choose at outset to guarantee to have your income paid for a fixed period of time (known as the ‘guaranteed payment period’).

The maximum period you can usually choose is 10 years.

If you were to die during the guaranteed payment period the annuity provider would continue to pay your income to your beneficiaries (or your estate where no beneficiaries have been nominated) until the end of the payment guarantee period.

Income paid from your Lifetime Pension Annuity to your estate under the guaranteed payment period may be subject to Inheritance Tax (subject to your personal circumstances).

Note:

Buying a payment guarantee period will be of benefit to your dependants only if you were to die during the guarantee period.

If you were to die outside of the guarantee period, no further income would be payable under the payment guarantee period option.

If you select a payment guarantee period, your income will be lower than if you do not.



Death Benefits


You can choose to provide an income of up to 100% of your income to a dependant for the rest of their life if you die before them.

This is known as the ‘Joint Life Annuity' option.

You can decide at outset whether your dependant should have the same or a lower income than you upon your death.

You can choose to provide 100%, 66.66%, 50% or 33.33% of your income as a dependant’s income.

Your dependant can be your spouse, civil partner, or another adult who is financially dependent (or interdependent) on you, such as an unmarried partner.

Usually, you can’t take the joint-life option for one of your children, unless they're an adult and depend on you because they have a physical or mental impairment.

Note:

Buying a joint life option will be of benefit only if your dependant is alive when you die. No dependant’s income would be payable if your dependant were to die before you.

If you select the joint life option, your income will be lower than if you do not.

The more income you provide for your dependant after your death under the joint life option, the lower your own income will be.

Income Payment Options


You can choose how often to have your annuity income paid.

The usual payment period choices available are as follows:

Monthly

Quarterly

Half-yearly or

Yearly.

Note: Minimum limits may apply to monthly, quarterly, and half-yearly income payments.

Your regular income will be paid into your bank or building society account.

Income: Payment In Advance Option


You can select that the first payment be made as soon as possible after your Lifetime Annuity is set up. This is known as ‘payment in advance’.

Each subsequent payment is made at the beginning of the payment interval that you have chosen, for example monthly.

Income: Payment in Arrears Option


Alternatively, you can select the ‘payment in arrears’ option.

Under this option, whatever payment interval you choose, your first payment will be deferred to the end of that period.

For example, if you choose a quarterly payment interval the first payment will be three months after your Lifetime Annuity has been set up.

Note:

How often you choose to receive your income and whether it is paid in advance or arrears will have an impact on the amount of income that you will receive.

Other Options


The options above are the main ones offered by most, if not all, annuity providers.

Some annuity providers do offer other options, which may be of interest to you.

An adviser will be able to point these out to you if they are appropriate to your circumstances.

Main Downsides of a Lifetime Annuity


A Lifetime Annuity has no cash in value at any time.

If you die in the early years of the policy unless you have chosen a dependant’s annuity and/or a guaranteed payment period you will get back much less than you paid for the annuity.

Unless you choose an escalating/increasing income, your income from your annuity will not go up.

This means that in future years any increases in inflation or income tax will reduce what you can buy with this money.

The annuity provider may not take your dependant’s health into account in setting their annuity rates.

Once you have bought an annuity, and the cancellation period has ended, even if your circumstances change, you will no longer have access to the funds you have paid to the annuity provider.

This means you won’t be able to:

Cash it in or get a refund.

Pay it back into your original pension plan or scheme.

Switch to a different annuity provider.

Alter or remove any of your chosen annuity options (e.g. the dependant’s annuity if there is no longer a dependant).